Updated: December 2025
If you’re considering becoming a contractor, one possible route is to work through an umbrella company. How and why you’d consider an umbrella company is another topic we’ve already covered in one of our earlier articles.
In this blog, we reveal the truth about the most common misconceptions circulating on the Internet and in contractor communities.
1. Umbrella companies only exist because of IR35 legislation reform
This is false. Umbrella companies have been around since the early 2000s, long before the IR35 legislation changes in 2017 and 2021. They offer a reliable income solution for contractors with multiple short-term contracts and provide a stable employment framework that simplifies tax compliance.
2. Umbrella employment is a scam
This is false. While the contractor services industry has been largely unregulated, significant changes are on the horizon. From April 2026, new Joint and Several Liability (JSL) legislation will transform the umbrella company sector by making recruitment agencies (and sometimes end clients) legally responsible for ensuring that PAYE and National Insurance contributions are paid correctly.
This new legislation is a game-changer for the industry. It means agencies and clients will be held jointly liable for any unpaid taxes if they work with non-compliant umbrella companies. As a result, the market is being cleaned up, with agencies becoming much more selective about which umbrella companies they’ll work with.
Until this regulation takes effect, contractors must remain vigilant and careful about whom they sign up with. Our top tip is to look for accreditations from the Freelancer and Contractor Services Association (FCSA) or The Association of Professional Staffing Companies (APSCo). Professional organisations thoroughly vet their members and ensure they are compliant.
The April 2026 legislation will create much-needed accountability in the sector and provide stronger protections for contractors. At SmartWork, as a long-standing FCSA Accredited member and APSCo Trusted partner, we’re fully prepared for these changes and remain committed to complete transparency and compliance.
3. Umbrella companies are only after your money
This is incorrect. A compliant umbrella company operates under the same rules as any UK employer, which means HMRC sets out the rules for taxes and National Insurance they deduct.
Umbrella companies make money by charging a “margin” (also called an administration fee), which should be clearly stated on your payslip. This transparent fee covers the administrative services, payroll processing, and compliance management they provide. Learn more about how much tax and NI you pay as an umbrella employee in our dedicated guide.
4. You get to keep 90% of your pay
This is false. Offering unrealistic take-home pay is a common tactic used by non-compliant companies to lure contractors. As mentioned above, umbrella companies operate under the PAYE (Pay as You Earn) system, so the difference in take-home pay between compliant providers should only vary based on their margin deductions. If you see promises of 85-90% take-home pay, this is a major red flag.
Legitimate umbrella companies are happy to provide free, transparent illustrations of take-home pay that clearly show all deductions. Search our blog to learn more about umbrella pay calculations and what you should realistically expect.
5. Umbrella companies deduct extra National Insurance
This requires clarification. Like any employment, you can expect income tax and National Insurance deductions on your umbrella payslip.
If you’re a basic rate taxpayer (total earnings below £50,270 per annum), you’ll pay 20% tax and 8% Employee’s National Insurance on your earnings over the annual personal tax allowance (£12,570 for 2025/26).
When you work through an umbrella company, they handle employment costs like taxes and pension contributions. Employment costs include Employer’s National Insurance, pension contributions, and the apprenticeship levy. These costs are covered by the assignment rate, which is the total amount the umbrella company receives from the agency or client for your work.
It’s important to understand that this rate isn’t the same as your gross pay because it includes these additional employment costs. These expenses don’t directly reduce your take-home pay because the umbrella company ensures they are covered separately. Recent laws require that you receive a Key Information Document (KID) before starting, which explains exactly how your pay is calculated, so there should be no confusion about your earnings.
All deductions are shown transparently on your payslip. Check out our handy guide that explains what’s on a SmartWork payslip.
6. Umbrella employment is self-employment
This is incorrect. When you join an umbrella company, you become one of its employees under a contract of employment. The umbrella company consolidates your income from various assignments into regular monthly or weekly pay and takes over the administrative burden that usually comes with self-employment. You also don’t have to worry about IR35 determinations as an employee.
However, you may still need to complete a self-assessment tax return in certain circumstances, such as if you have other sources of income. Visit our detailed article to find out whether you need to file one.
7. Umbrella workers are exempt from IR35
Yes, this is true. Umbrella companies provide direct employment under PAYE, making them IR35 compliant by default. As an umbrella employee, IR35 legislation doesn’t apply to you, which removes a significant compliance burden and risk.
8. You can’t claim expenses as an umbrella worker
This is incorrect, although it’s understandable why confusion exists. In 2016, the government introduced rules preventing umbrella employees from claiming travel and subsistence expenses if they work under Supervision, Direction or Control (SDC), as this treatment aligns with that of regular employees.
Your umbrella company will review your contract to determine if SDC applies. If your working arrangement doesn’t fall under SDC, you can claim certain expenses immediately through payroll, while others can be claimed at the end of the tax year via a P87 form.
The fundamental rule is that any expenses you claim must be incurred wholly, exclusively and necessarily in performing your employment duties. Remember to keep all your receipts!
Claiming expenses can be complicated, so we’ve created a dedicated section in our knowledge base for expenses.
9. You must join an auto-enrolment pension scheme when signing up with an umbrella company
This requires clarification. Like all UK employers, umbrella companies must enrol eligible employees into a workplace pension scheme under auto-enrolment legislation. However, you have the right to opt out at a later date if you choose to, though you’ll be re-enrolled every three years as per regulations.
Many umbrella companies, including SmartWork, offer alternative ways to contribute to your pension, such as salary sacrifice or voluntary contribution arrangements, which can be tax-efficient. Don’t forget to ask about your pension options before joining. In our knowledge base, you will find everything you need to know about pensions for umbrella workers.
10. Umbrella companies don’t provide the same employment benefits as traditional employers
This statement is false. As an umbrella employee, you’re entitled to the same statutory benefits as any other employee in the UK. This includes:
- 5.6 weeks’ paid annual leave (28 days for full-time workers)
- Statutory Sick Pay (SSP)
- Statutory Maternity/Paternity/Adoption Pay
- Workplace pension contributions
- Protection under employment law
Being an umbrella employee gives you the freedom and flexibility to choose between contracts (or even work multiple contracts simultaneously), combined with the simplicity and security of employment benefits where your administrative burden and tax obligations are handled for you.
Final Thoughts
We hope this article has helped bust the myths about umbrella companies and provided clarity on how umbrella employment really works. If you have any questions or would like to schedule a free, no-obligation consultation, don’t hesitate to contact us via our website contact form or by calling 0800 434 6446.
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